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DOTTORATO DI RICERCA
DIRITTO ED ECONOMIA (LAW AND ECONOMICS)
Ciclo XIX
Settore/i scientifico disciplinari di afferenza: SECS-P01
TITOLO TESI
INTANGIBLE RESOURCES AND ORGANIZATION
CAPITAL: MEASUREMENT AND ECONOMIC
EVALUATION
Presentata da: CLAUDIA TRONCONI
Coordinatore Dottorato
Relatore
Prof. Antonio Carullo
Prof. Sandro Montresor
ii
AKNOWLEDGEMENTS
I would like to sincerely thank my tutor, Prof. Sandro Montresor, first of all for his precious advice, the amount of time he has dedicated me, and his constant assistance; also, I would like to thank him for his moral support and for truly believing in my ability “to deliver”. The help of Dr. Giuseppe Vittucci Marzetti has been crucial for what concerns the empirical analysis of chapter 4. He has dedicated his time and attention, patiently sharing his knowledge, thoughts and ideas with me. Working with Prof. Montresor and Dr. Vittucci has been a great experience from which I learned a lot and to them I give my gratitude and best wishes for life and career. I would also like to thank Prof. Gilberto Antonelli and Prof. Leonidas Koutsougeras for their valuable advice. All remaining mistakes are mine only.
iii
List of Contents
AcknowledgmentsIntroduction………1
Chapter 1: The identification of intangible resources, distinctive characteristics and related problems 1.1 The importance of intangible resources………...9
1.2 Intangibles: assets, capital, resources, and investments………....10
1.3 An analysis of the definitions found in the literature………12
1.4 A reorganization and comparison of the proposed classifications………15
1.5 The accounting definition of intangible assets……….21
1.6 The distinctive features of intangible resources……….………..22
1.7 Valuation and measurement methods……….…..26
1.8 The problems related to intangible resources and proposed solutions………….30
1.9 Intangible resources: a first set of conclusions………...36
Chapter 2: On the theoretical analysis of intangible resources 2.1 Intangible resources and economic theory………39
2.2 Intangible resources in the classical economic theory………..40
2.3 The neoclassical theory of the firm and the assumptions hiding intangible resources…………..………41
2.4 The path towards the “discovery” of intangible resources: the critique to the assumptions of the neoclassical theory of the firm…………43
2.4.1 Imperfect information, bounded rationality and market failures: the contributes of the contractarian approach to the theory of the firm………...….44
2.4.2 The bounded rationality of the firm: the behavioralist approach………...46
2.4.3 The need to cope with uncertainty: a role for the resources of the firm………....46
2.5 Routines, skills and organizational capabilities: the evolutionary theory of the firm……….48
2.6 Intangible resources analysis through the resource-based view 2.6.1 The resource-based view and the knowledge-based view approach……….53
2.6.2 The resource-based view classifications of intangibles and the rational for their importance………...57
iv
Chapter 3: On the empirical relationship between intangible resources and firm performance
3.1 Intangible resources and firm performance in empirical studies………..…69
3.2 Intangible resources as Innovation capital: effect on performance 3.2.1 R&D and firm performance……….70
3.2.2 Patents and firm performance………..79
3.3 Beyond innovation related intangibles: Human Capital, Information Technology and Advertising and their effect on firm performance 3.3.1 Human capital………..84
3.3.2 Information Technology……….86
3.3.3 Alliances and advertising………89
3.4 Further issues: interdependence of intangible resources and dependence of results on performance measure used……….91
3.5 Organization Capital and firm performance……….94
Chapter 4: Organization capital and firm performance. Empirical evidence for European firms 4.1 Organization capital and income statement: in search for a possible proxy………98
4.2 Organization capital and firm performance: two alternative methods based on income statement proxies……….………..101
4.3 Organization capital and firm performance on a sample of European firms: Organization capital measurement, model and estimation method 4.3.1 Measurement of variables………..112
4.3.2 The model and estimation procedure……….113
4.4 Data collection and analysis: the OC of the Compustat Global………..118
4.5 Results 4.5.1 Organization capital and firm output……….133
4.5.2 Organization capital and profitability………145
4.6 Discussions and conclusive remarks………..150
Appendix 1: Further Estimates: Production function with OC………...157
Appendix 2: Estimates for the model without OC: 3 input production function....161
Conclusions………...166
v
LIST OF TABLES AND FIGURES TABLES
Table 1.1: Intangible resources: Terminology………..11
Table 1.2: Intangible resources: Definitions………....13
Table 1.3: Intangible resources: Classifications………..…16
Table 4.1: Compustat Global proxy items and study variables……….…120
Table 4.2: Industry classification………..….121
Table 4.3: Variables Analysis (levels) – year 2006………...122
Table 4.4: Variables Analysis (growth rate) – year 2005/2006……….126
Table 4.5: Empirical estimates. Cobb Douglas production function (levels)………134
Table 4.6: Empirical estimates. Translog production function (levels)……….136
Table 4.7: Empirical estimates. Translog production function (levels) – Huber and Tukey biweights………137
Table 4.8: Translog function estimated output elasticities evaluated at the sample mean of the data (levels)………..….138
Table 4.9: Empirical estimates. Cobb Douglas production function (first difference)…….…140
Table 4.10: Empirical estimates. Translog production function (first difference)…………..…141
Table 4.11: Empirical estimates. Translog production function (first difference) – Huber and Tukey biweights………...……142
Table 4.12: Translog function estimated output elasticities evaluated at the sample mean of the data (first difference)……….….143
Table 4.13: Empirical estimates. Cobb Douglas (levels) – Profitability………146
Table 4.14: Empirical estimates. Translog (levels) – Profitability……….……148
Table 4.15: Translog function estimated output elasticities evaluated at the sample mean of the data (levels) – Profitability………..………149
Table A1.1: Empirical estimates. Cobb-Douglas production function with instruments (levels)……….157
Table A1.2: Translog function estimated output elasticities evaluated at the sample median of the data (levels)……….158
Table A1.3: Empirical estimates. Cobb-Douglas production function with instruments (first difference)……….……….158
Table A1.4: Translog function estimated output elasticities evaluated at the sample median of the data (first difference)………..…….159
Table A1.5: Estimated returns to scale (levels)………...…………159
Table A1.6: Estimated returns to scale (first difference)………...……..160
Table A1.7: Translog function estimated output elasticities evaluated at the sample median of the data (first-difference)………..……160
Table A2.1: Empirical estimates. 3 input Cobb Douglas production function (levels)………...161
Table A2.2: Empirical estimates. 3 input Translog production function (levels)………162
Table A2.3: 3 input Translog function estimated output elasticities (levels)………. 163
Table A2.4: Empirical estimates. 3 input Cobb-Douglas production function (first differences)………..………163
Table A2.5: Empirical estimates. 3 input Translog production function (first difference)………164
Table A2.6: 3 input Translog production function estimated output elasticities (first difference)………165
vi
FIGURES
Figure 2.1: The firm state: an extended view………51
Figure 2.2: A classification of intangible resources on their capability to generate competitive advantage………...……58
Figure 2.3: A classification of resources based on their capability to generate sustained competitive advantage………59
Figure 2.4: A classification of intangible resources based on the resource-based view…………...61
Figure 2.5: Classification of intangible resources: a proposal……….64
Figure 4.1: Sample distribution by country………128
Figure 4.2: Non R&D sub-sample distribution by country………129
Figure 4.3: R&D sub-sample distribution by country………129
Figure 4.4: Mean and Median OC and R&D stock by countries………130
Figure 4.5: Sample distribution by industry………...…………131
Figure 4.6: Non R&D sub-sample distribution by industry………132
Figure 4.7: R&D sub-sample distribution by industry………..…….….132
1
Introduction
In the last few decades economic systems have pervasively gone trough a structural change. On the one hand, the latest “wave” of globalization processes, characterized by new emerging powers (Harris, 2005) and international fragmentation (e.g Jones and Kierzkowski, 2003), along with phenomena such as deregulation and privatization, has augmented the degree of market competition dramatically, both intensively and extensively. On the other hand, the increasing complexity of the innovative processes (Gottfredson and Aspinall, 2005) and volatility of consumer preferences have made both technological and market uncertainty more intense.
In this new scenario, firms have been forced to reconsider the sources of their competitive advantage and the barriers to its erosive imitation. Focusing on internal resources and competences is no longer sufficient; understanding which of them are more strategic has become necessary (Barney, 1991).
Both theoretical and empirical studies have thus started to bring to the front of the debate the role of the so called firms’ intangibles, claiming these resources – such as R&D, innovative business process and designs, management structures and organizational systems, human capital, patents and copyrights - rather than tangible resources – such as physical machinery, plant and equipment - to be the key factors in providing firms with sustained competitive advantage in the new scenario. Indeed, the literature supporting this argument is becoming massive and one is almost naturally led to conclude this to be the new strategic “business credo” (e.g. Hall, 1992, Lev, 2001, Edvinsson, 2000).
This is also the starting point of the present thesis, whose aim is to investigate whether, and eventually how far, the “supposed” key role of intangible resources in driving firm competitiveness actually has robust scientific foundations, both from a theoretical and an empirical perspective. In particular, this thesis intends to critically re-examine the notion of intangibles as such, the economic nature of its causal link to firm performance and the empirical impact that a “special” kind of intangibles – as we will
2 see, the organizational capital (OC) – has on a large number of firms in the European area.
Although the massive literature on the topic apparently seems to make such a research effort redundant, its relevance and originality become evident on the basis of the following considerations.
At the outset, one should recognize that the peculiar features that differentiate intangibles from physical resources, and make them key factors to gain competitive advantage, are also responsible for several problems related to their definition, such as lack of consensus on terminology (capital, asset, resource, investments), clear inclusion and exclusion criteria to meet in order to belong to the category, classification problems such as definition of sub-classes of intangibles and their content. This is also why intangibles have recently attracted the growing interests of scholars from different disciplines (e.g. Griliches and Mairesse, 1981, Lev, 2003, Andriessen, 2004, Garcia-Ayuso, 2003, Bianchi and Labory, 2002). Yet, even though many have written about them, there is still no consensus concerning the real nature of these resources. This first issue (definition problems) deserves special attention and is thus addressed in the first part of this thesis (Chapter 1). Here, in order to tackle the definition problems, intangibles are, at first, considered as a unified category, and the problems that such a perspective brings about are analysed. Looking for a possible general and theoretical approach to analyse intangibles, the first part of the research is based on general contributions that address all intangibles, and not intangible resources taken individually. The most recent literature reviews related to the topic have been selected and their references compared to identify the leading authors in the field; their most recent publications have then been included to study the latest developments. The selected criteria have privileged contributions coming from strategic management, finance and social science fields; intangibles have been analysed from the firm’s perspective and this has left little room for the analysis of macroeconomic aspects.
From this frist part of the thesis, a certain degree of confusion emerges in the terminology used to identify intangibles (“intangible assets”, “intangible resources”, “intellectual capital” or simply “intangibles”), in their definition and classification. What is more, attempts to create a more rigorous framework through the identification of their
3 sub-components have generated further terminological and conceptual problems, without improving the understanding of the phenomenon.
To the problem of definition one should also add that of their measurement. The peculiar features of intangibles in fact generate problems concerning the capacity of the firms to control intangibles and measure the benefits deriving from them. Due to their immateriality and imperfect appropriability, intangibles are not recorded in financial reports, and markets do not have enough information to value them. Firms and markets are increasingly asking alternative mechanisms for their measurement and valuation. Many alternative measurement methods have been proposed but none have been proven successful. The measurement problems are also reflected in the difficulties that firms have in identifying their intangible portfolio, exploit, develop and generate intangibles.
A second important starting point of this research relates to the economic theory for intangibles or, better to say, the lack of an economic theory for them, an issue which is addressed in the subsequent part of this thesis (Chapter 2). It is argued that the analysis of intangibles is usually not related to a conceptual theory; only a few authors point to the evolutionary theory of the firm and the resource based view (RBV) as possible theoretical frameworks (Hall, 1992, Clement et al, 1998, Fernandez et al, 2000). The contributions of leading authors in the field of the theory of the firm and RBV have therefore been selected in search for a possible intangible – related view and intangible resources and the reasons behind their importance for the firm are analysed in the context of a “theory”.
Through an extensive review of the literature, it is possible to show that traditional economics has for long ignored intangibles, due to the peculiar features that make them non- or imperfectly tradable commodities. However, the analysis of the theories of the firm shows that those “heterodox” approaches that reject the assumptions of the neoclassical theory, in particular the evolutionary theory of Nelson and Winter (1982) and its strategic analysis development, the RBV, can possibly provide a theoretical framework for the analysis of intangible resources, and hopefully improve their understanding.
While the evolutionary theory provides a dynamic framework that fits well the representation of the “flows” (investments) in intangibles, the RBV, static approach, offers a possible model for the analysis of the stock of intangible resources by outlining
4 the role of firm resources and the main features that resources must have to generate competitive advantage. The RBV applied to intangible resources has led to the recognition of the role of knowledge, particularly analyzed by the knowledge-base view (KBV) (Grant, 1996) that has underlined the important role of the organisational culture in its transmission and in the generation process of new knowledge.
Building on RBV classifications of intangibles and on the contributions of the literature, mainly managerial, on intangibles, I propose an eclectic classification of intangibles that groups them in human capital, organizational capital (OC), intellectual property and innovation related capital. The application of a RBV model (Barney, 1991), that requires resources to be not only valuable (i.e. controlled and strategically significant) but also heterogeneous and imperfectly immobile in order to be classified as sustainable-advantage resources, seems to indicate that the tacit organisational knowledge of the firm, component of OC, is the resource that better satisfies this conditions. It is however extremely hard to separate tacit organisational knowledge from codified organisational knowledge, other component of OC, as the degree of intertwining between the two is very high, and organisational knowledge also needs its codified dimension. We therefore conclude that OC, identified with codified knowledge (norms, guides and databases), tacit knowledge (corporate culture and organizational routines, co-operation agreement) and reputation, is, for its specific characteristics, a sustainable-advantage resource, therefore crucial for firm performance. This is a first important result of the thesis, although still from a purely theoretical perspective.
Such a theoretical result however needs empirical confirmation. As the theory indicates intangibles, OC in particular, as the most competitive resources of the firm, in search for an empirical confirmation of this theoretical assumption, studies that investigate the effect of intangibles on firm performance are critically analysed (Chapter 3). Once more, the review is critical and, rather than aiming to update the state of the art, wants to outline how the correspondence between theoretical and empirical arguments is actually scanty given that, very often, the former is not truly supported by the latter.
As noticed with respect to works on definition, management and measurement problems of intangibles, empirical works on intangibles belong to different fields, use different methodologies, focus on different types of intangibles and are hardly
5 comparable. For these reasons, a selection criterion has been identified: the most recent and “founding” contributions have been included. The analysis critically presents the most used methodologies and the up to date results related to the link between intangibles and performance.
Studies on the impact of intangibles on performance have focused mainly on R&D and innovation related intangibles. More recently, other dimensions of firm’s intangibles have been analysed: human capital, IT and advertising. The attention on these types of intangibles is due to the fact that there is relatively no consensus in academia about their definition, even though different proxies are used to measure them. Despite concerns about statistical tools, quality of data and measurement errors, the evidence of a positive relationship between these intangibles and firm performance has been somehow confirmed, even though results are not comparable and strongly vary in magnitude. Efforts of researchers who have attempted to measure the effect of OC on firm performance have instead been “uncoordinated and sporadic” (Black and Lynch, 2005) and have not reached conclusive results. An extensive analysis of empirical studies on the relationship between intangibles and firm performance is therefore important to analyze how the causal relationship mechanisms, measurement and econometric problems have been treated with respect to other types of intangible resources.
As OC is a resource formed by the interaction of different components and there is a lack of consensus about what these components are, researchers have chosen to proxy OC using data related to its elements: mainly information and communication technologies (ICT), training, Human Resource Systems (HRS) and workplace practice. Even though there is evidence that these single components have an effect on performance, the same conclusion cannot be reached for OC.
The analysis of the literature on intangibles points out at a specific intangible as the most important for firm performance: OC. The analysis of the empirical evidence of this link instead shows that, while other types of intangibles have been widely empirically analysed, the empirical evidence that links OC to firm performance is not as wide and solid. On this ground, in the attempt to fill this gap, an eclectic model that draws on recent developments in the field (Lev and Radhakrishnan, 2005, De and Dutta, 2007) is
6 presented and tested on a sample of European firms whose data are taken from the Compustat Global database.
This application is original and innovative from both a methodological and an empirical perspective.
As far as the model is concerned, OC, retained an input of the production function, is measured by capitalizing, through the perpetual inventory method, an income statement item (Selling, General and Administrative expenses) that includes expenses linked to information technology, business process design, reputation enhancement and employee training. This measure of OC is employed in a cross-sectional estimation of a firm level production function - modeled with different functional specifications (Cobb-Douglas and Translog) - that measures OC contribution to firm output and profitability. The model is estimated in levels and first difference, through the OLS, controlling for heteroskedasticity of errors, endogeneity of inputs and influence of outliers.
The research work of this thesis is also valuable in terms of its application. Indeed, the quantitative data, on which the empirical analysis has been based, is drawn from the Compustat Global database that provides normalised financial data on over 28,500 worldwide publicly traded firms that represent more than 90% of the world’s market capitalization. The dataset selected for this analysis includes 1,309 (Euro area, Denmark and UK) reporting Selling, General and Administrative Expenses. Data for each firm in the sample include: industry, country, yearly revenues (2005-2006), yearly SGA (2000-2006), yearly property, plant and equipment (2005-2006), yearly intangible assets (2005-2006), yearly R&D expenses (2000-2006), yearly n. of employees (2005-2006), net income (2005-2006).
As I will argue more extensively in the conclusions, results that are quite robust across the different specifications validate the theoretical assumption that OC, idiosyncratic, firm-specific, interrelated and hard to imitate, identified as a sustainable advantage resource is, in fact, determinant and positively affects firm performance. Furthermore, the effect of OC on performance is significantly higher compared to the effect of physical capital; this backs up the literature that supports the new strategic “business credo” that identifies intangibles as the main competitive advantage resource.
7 Nonetheless, the significant effect of physical capital also supports the RBV, according to which firm resources are interconnected, bundles, and need one another in order to produce competitive advantage.
This thesis is structured into 4 chapters. In brief, Chapter 1 attempts to clarify the “terminological soup” related to intangibles and systematically organise, present, and compare different definitions and classifications proposed by the literature. The peculiar features of intangibles and the problems they entail; in particular measurement, management and market valuation, are analysed. Proposed measurement and management methods and solutions are also presented. Chapter 2 analyses the treatment of intangibles in the economic theories of the firm, starting from the neoclassical to the heterodox approach, in particular the evolutionary theory of Nelson and Winter (1982). Intangibles are then analysed in the context of the RBV; a classification model is proposed and OC is identified as the intangible responsible for sustained competitive advantage and therefore crucial for firm performance. Chapter 3 analyses the methodologies used in the empirical literature to investigate the effect of intangibles on firm performance. Studies are grouped according the specific type of intangibles they focus on. Empirical studies on the relationship intangibles-firm performance have been sporadic and have failed to reach firm conclusions with respect to OC; in the attempt to fill this gap Chapter 4 test the effect of OC on a large sample of European firms. A measurement method based on an income statement item (SGA) is presented together with its rational; the model and the estimation method are explained and the dataset analysis in carried out. The two final sections present results, comments and conclusions.
The value of the work is given by several factors. The analysis of chapter 1 re-organise definition issues related to intangibles in an original way, in the attempt to provide methodological order and clarifications. The proposed classification of intangibles is based on theoretical considerations – RBV – and provides conceptual rigorous criteria to identify intangibles responsible for sustained competitive advantage and, therefore, firm performance. The empirical analysis on the effect of OC on firm performance provides a valuable contribution to the existing empirical literature that hitherto has not managed to provide strong evidence. Furthermore, the analysis is original with respect to methodology used to measure OC and model used to analyze its effect on
8 firm performance. Last but not least, the novelty and composition of the dataset, that includes a wide variety of industries, differently form existing studies that mainly focus on R&D intensive sectors, provides further insight. The robustness of the results across the different specifications can be taken as a confirmation of the validity of the methodology and empirical analysis conducted, that has produced interesting findings and confirmed the main hypothesis tested: the importance of OC for firm performance.
9
Chapter 1. The identification of intangible resources, distinctive
characteristics and related problems
1.1 The importance of intangible resources
As argued by many authors in the field, intangible resources are not a new phenomenon. What is new is the increasing importance they have for the enterprise and the economic system. In the past, the economic environment was relatively stable and physical capital and labour were the main factors of production (Bianchi and Labory, 2002). Nowadays the situation has changed: globalisation, deregulation, new information and communication technologies have created a turbulent and uncertain economic environment where competition is fierce and firms survive only by innovating and reaching a competitive advantage. Therefore, the attention needs to be put on those factors that create successful conditions in this economic environment.
The increased competition brought about by deregulation, globalisation and new technologies is not enough to describe how the economic environment has changed. Not only has competition increased, it has also changed in a qualitative way. Society (at least in the developed countries) has reached a certain level of welfare and the basic needs of individuals are satisfied. As a consequence, consumers have become more and more sophisticated and so has the demand for products. Strategies based on price competition do not work anymore in this context, and firms focus on non-price strategies such as differentiation and product innovation to gain and expand market shares.
Another factor that has changed the way in which firms compete is the “commoditization of physical assets” (Lev, 2005, p. 301). The term “commoditization of physical assets” alludes to the development of the mass production system that has made machinery, equipment and technology widely available at a reasonable cost. Everybody can own physical factors of production therefore they are only a necessary condition to operate, not a source of advantage.
Many authors argue that the immaterial, intangible, knowledge part of the firm has now become the key factor of firms’ success. Firms can reach sustainable competitive advantage only through the development of capability differentials and “the feedstock of these capability differentials is intangible resources” (Hall, 1992, p. 135).
10 The growing importance and the increasing role played by this type of resource in assuring performance results have raised the attention of many disciplines, ranging from strategic management, accountancy, finance, organisational theories, economics, and the interest of the business community. The approaches are heterogeneous and privilege different aspects. What is common to all of them is the recognition of the importance of intangibles and the difficult problems they raise due to their peculiar features. Unfortunately, none of the approaches provides a uniform, sound theory of intangibles and all struggle to explain the phenomena related to them.
A clear analysis should start with the identification of its object. However, this is not an easy task in the case of intangibles as they are poorly defined with respect to term, definition and classification (Johanson, 2002; Kaufmann and Schneider, 2004; Meritum, 2002). This research therefore starts with a critical analysis of the terminology, definitions and classifications proposed in the literature on intangibles.
1.2 Intangibles: assets, capital, resources, and investments
Table 1.1 presents a summary of the most frequent terminology used when referring to intangibles. Scholars belonging to accounting, finance and economics use the term “intangible assets”; practitioners and strategic management scholars use the term “intellectual capital” and “intangible resources”. Clement et al (1998) focuses on the dynamic aspects of the creation of resources and uses the term “intangible investments”. The distinction among the terms used, thus, does not appear too precise and founded on sound conceptual reasons. The majority of the authors, in fact, seldom take a stand regarding the terminology and end up switching back and forth with the term asset, capital or resources, using them indistinctively.
The first conclusion that can be reached is that assets, resources and capital are the most commonly used terms to classify intangibles. These terms need to be clarified and their use justified; however only a few of the authors analysed explain the reasons behind their choice. Hall (1992) defines “assets” as those resources that are protected by legal property rights; only part of intangibles (e.g. patents, copyrights) can therefore be called assets. Some authors (Johanson, 2002; Haanes and Lowendahl, 1997) focus on the distinction between assets and resources; according to them, assets are a subset of
11 resources, as the term “asset” is associated with control or ownership. Based on these considerations and on the peculiar features of intangibles, where “ownership” is not always easy to establish, the preferred term for intangibles should be “resources”.
Table 1.1: Intangible resources: Terminology
Author Term
Vance, C. (2001) Intangible assets
Lev, B. (2001, 2003, 2004, 2005) Intangible assets
Gu, F., Lev, B. (2001) Intangible assets
Stolowy, H., Jeny-Cazavan, A. (2001) Intangible assets
Garcia-Ayuso, M. (2002) Intangible assets
Bianchi, P. and Labory, S. (2002) Intangible assets
Royal Institute of Chartered surveyors (2003) Intangible assets Amir, E., Lev, B., Sougiannis, T. (2003) Intangible assets
Eustace, C. (2003) Intangible assets
Kaufmann, L., Schneider, Y. (2004) Intangible assets
Kaplan, R. S., Norton D. P. (2004) Intangible assets
Matolcsy, Z., Wyatt, A. (2006) Intangible assets
Webster, E., Jensen P. H. (2006) Intangible assets
Sullivan, P. H. (1999) Intellectual capital
Edvinsson, L. (2000) Intellectual capital
Brennan, N., Connel, B. (2000) Intellectual capital
Bontis, N. (2001) Intellectual capital, knowledge assets
MERITUM (2002) Intangibles, Intellectual capital
Andriessen, D. (2004) Intellectual capital
Swart, J. (2006) Intelletual capital
Barney, J. (1991) Intangible resources
Hall, R. (1992) Intangible resources
Bontis, N., Dragonetti, N. C., Jacobsen, K., Roos, G. (1999) Intellectual capital, intangible resources
Johanson, U. (2000) Intangible resources
Canibano, L., Sanchez, M. P. (2003) Intellectual capital and intangible resources
Bukh, P. N., Johanson, U. (2003) Intangible capital, knowledge resources
Rastogi, P. N. (2003) Intellectual capital, knowledge resources
Clement, W., Hammerer, G., Schwarz, K. (1998) Intangible investments
The MERITUM guidelines (MERITUM, 2002) provide further clarifications about the terminology. While establishing that intangibles and intellectual capital designate the same concept, the report argues that the term “intangible asset” should only be used when
12 referring to intangible investments that can be capitalized, based on the satisfaction of accounting criteria. Academic scholars have started using the term “intellectual capital” after the concept was first created by practitioners1. Some authors use the term intellectual capital as formed by intangible “or knowledge” resources.
In this analysis the term intangible resources is mainly used as it refers to a wider category than assets; the abbreviation “intangibles” is used just for simplistic purposes2, while respecting the terminology used by the original authors. Based on the above considerations, the term “resources” is considered more appropriate to grasp the variety of intangibles and include also those resources that are not taken into consideration by traditional financial reports.
1.3 An analysis of the definitions found in the literature
There are three ways to identify intangibles: by definition, by classifications or by the combination of both. Table 1.2 presents several definitions of intangibles proposed by the literature. As seen for the terminology used to designate intangibles, there is also a lack of consensus around their definition. A group of definitions are quite similar (Lev, 2001, 2005; Royal Institute of Chartered Surveyors, 2003; Kaufmann and Schneider, 2004) and define intangible assets essentially by means of two features: lack of physical substance and capacity to generate future profits. It is interesting to note how they are all associated with the term “asset”, even though these definitions also include intangible resources such as skills, capabilities and competences that will probably never be classified as assets on firms’ balance sheets. This outlines how, when referred to intangibles, the term “asset” is used with a heterodox meaning in comparison with its accounting definition. According to this first set of definitions, intangibles could be apparently very similar to financial assets which also lack physical substance; the feature that renders financial assets different resides in the fact that they represent claims over both tangible and intangible corporate assets; therefore they do not belong to the category of intangibles (Lev, 2005).
1 Mainly as a result of the work at firms such Skandia, Dow Chemical, Canadian Imperial Bank of
commerce (Bontis et al, 1999)
2 Several times authors just talk about “intangibles” without specifying the implicit term next to it. This is a
13
Author Term Definition
Lev, B. (2001) Intangible assets "claim to future benefit that does not have a physical or financial (a stock or a bond) embodiment" p. 5
Gu, F., Lev, B. (2001) Intangible assets (or capital) "Determined by their drivers: R&D, advertising, brands, Information Technology, Human Resources" p. 1 Royal Institute of Chartered
Surveyors (2003)
Intangible assets "something with a value based on its ability to generate future benefits for a company (usually cash flows) that does not have physical or financial presence." p. 2 Kaufmann, L., Schneider, Y.
(2004)
Intangible assets "Entitlement to future benefits withouth physical form", p 375 (Explicitely states to adopt Lev's definition)
Kaplan, R. S., Norton, D. P. (2004)
Intangible assets "knowledge that exists in an organization to create differential advantage" and "capabilities of the company's employees to satisfy custumer needs", p. 14
Lev, B. (2005) Intangible assets "Sources of future benefits that lack a physical embodiment", p. 299
Webster, E., Jensen P. H. (2006) Intangible assets Investment in intangibile capital is a "search for monopoly profits", p. 84
Sullivan, P. H. (1999) Intellectual capital "knowledge that can be converted into profits", p.133 MERITUM (2002) Intangibles, Intellectual
capital
"non-physical sources of future economic benefits that may or may not appear in corporate financial reports", p. 9 Swart, J. (2006) Intelletual capital "tangible output in the form of products and services
within the firm's market place", p 138
Hall, R. (1992) Intangible resources Feedstock of capabilities differentials that generate suatainable competitive advantage
Fernandez, E., Montez, J. M., Vazquez, C. J.
Intangible resources "soft resources which basically consist of knowledge or information", p.81
Bontis, N., Dragonetti, N. C., Jacobsen, K., Roos, G. (1999)
Intellectual capital, intangible resources
"Collection of intangible resources and their flows", (p. 11). Control is a necessary condition to qualify as a resource.
Rastogi, P. N. (2003) Intellectual capital, knowledge resources
"holistic capacity and prowess to create value through the exploitation of knowledge as the quintessential resource", p. 228
Table 1.2: Intangible resources: Definitions
Gu and Lev (2001) define intangible capital through the sources that create it: investments in “R&D, advertising, brands, information technology, and human resources practices” (op. cit., p.1). However these are often classified as intangible assets themselves, therefore Gu and Lev’s “definition” does not add much in terms of clarifying the category.
Common to some definitions is the focus on intangible capital/resources as the knowledge (Fernandez et al., 2000) that generates differential advantages (Kaplan and Norton, 2005) or profits (Sullivan, 1999) or as the capacity to use knowledge to create
14 value (Rastogi, 2003). For Hall (1992) intangible resources are the tools that create capabilities differentials, source of competitive advantage.
Intangibles seem therefore to be frequently associated with knowledge and capabilities to use knowledge; the level of abstractness of the definition is obviously very high. Another element that emerges from the definitions is the interdependence of intangibles: intangibles exist in the organization (Kaplan and Norton, 2005) and are holistic (Rastogi, 2003).
All the definitions have a static approach, aiming to give a picture of intangibles at a certain time; only Bontis et al. (1999) include in their definition of intangible capital the flows related to intangible resources. Resources are defined as “controlled” factors contributing to the value creating processes of the firm. Since control is the condition to qualify as resources, and the degree and scope of control on the resources varies from firm to firm, intangible resources (and therefore intellectual capital) are context-specific. This is outlined as another factor that creates problems in the formulation of an objective definition that can identify intangibles in all situations and for all the firms.
The most peculiar definition is the one offered by Swart (2006). He argues that intellectual capital is a concept that varies according to the perspective used to analyse it. Intellectual capital can be seen as a factor of the production process, as a “value-creation process in itself” (op. cit, p.138) or as knowledge and skills embedded in the tangible outcome of the production process. Swart sees intellectual capital under this last perspective. In this analysis intangible resources are considered as input in the production process.
From this picture it emerges that the second class of problems (the first being related to the terminology) relates to the lack of a clear definition, which does not give clear inclusion and exclusion criteria. Intangibles do not have physical substance, are strictly related to knowledge and capabilities, are interdependent, exist in the context of organizations and are firm-specific, generate future and monopoly profits; this is all that can be said about them from the definitions analysed.
15
1.4 A reorganisation and comparison of the proposed classifications
Definitions of intangibles based on classifications provide further insights about what intangible resources are. Table 1.3 groups the most used ones on the basis of the number of sub-classes of intangibles identified.
The classifications of the first group are almost overlapping and define intangibles as mainly formed by five types of resources. The most relevant weakness of these two classifications is the fact that they do not specify the content of the classes and provide a list of resources that is not exhaustive.
The second group classifies intangibles in four categories. Lev (2005) labels them product/services, customer related, human resources, and organizational capital. The first category identifies those situations where “the physical component is overshadowed by the intangible ingredient – knowledge – embedded in them” (op. cit., p. 300) and refers, for example, to computers and software. However, it is not specified when the intangible part embedded into the physical component becomes so important that the tangible component is classified as intangible, even if the requirement of lack of physical substance is not respected. This is a strong weakness, especially nowadays, where products become more and more sophisticated and are the outcome of a production process that embodies a great amount of knowledge in them. Customer related intangibles are essentially advertising and brand names; human resources related intangibles are the skills of the workforce; organizational capital is the structure of the firm, when it provides an efficient way to operate. Webster and Jensen (2006) adopt a similar classification, even though they label the categories in a slightly different way. The main difference relates to the extent of relational capital. The authors seem to consider in this category also the relationships with suppliers and distributors, while Lev (2005) focuses only on customers (customer capital). Another similar classification to the two just mentioned, is the one of Brooking (1996) that has measurement purposes and divides intellectual capital in four sub-groups. Market assets comprehend those resources related to the external functioning of the firm (such as customer related capital, alliances and agreement with competitors just to name two); intellectual property is the second sub-group; human centred assets include the collective capabilities of the employees; infrastructure assets include corporate culture and technology, information and
16 communication systems. Bianchi and Labory (2002) refer to the aspects of intangibles studied by economics and more than classifying them, they outline some relevant aspects.
Table 1.3: Intangible resources: Classifications
Author Term Classification
Gu, F., Lev, B. (2001) Intangible assets 5 types: R&D, Advertising, Brands, Human
Resources, Organisational Capital Royal institute of Chartered Surveyors
(2003)
Intangible assets "Organisational design, brand names,
corporate identity, software, R&D", p. 1
Brooking, A. (1996) Intellectual Capital Market assets, intellectual property, human
centred assets, infrastructure assets
Bianchi, P. and Labory, S. (2002) Intangible assets Innovation, human capital, organisation,
knowledge
Lev, B. (2005) Intangible assets Products/services, custumer related, human
resources, organisational capital
Webster, E. Jensen P. H. (2006) Intangible assets Human, Organisational, Marketing, Relational
Capital
Sveiby, K. E. (1997) Intangible assets External structure, internal structure,
individual competence
Stolowy, H., Jeny-Cazavan, A. (2001) Intangible assets R&D, goodwill, other Intangible assets
Vance, C. (2001) Intangible assets Human, internal structural external capital
MERITUM (2002) Intangibles, intellectual
capital
Human, organizational and relational
resources
Canibano, L., Sanchez, M. P. (2003) Intellectual capital and
intangible resources
Human, structural and relational capital
Kaufmann, L., Schneider, Y. (2004) Intangible assets Proposes different classifications of others.
Findings: Mostly 3 groups
Lev, B. (2001) Intangible assets Discovery, organisational practices, human
resources
Kaplan, R. S., Norton D. P. (2005) Intangible assets Human, organisational and informational
capital
Hall, R. (1992) Intangible resources Assets and skills
Evinsson, L., Malone, M. S. (1996) Intangible resources Human and structural capital
Bontis, N., Dragonetti, N. C., Jacobsen, K., Roos, G. (1999)
Intellectual capital, intangible resources
According to the managerial actions required.
Human Capital (competence, attitude,
intellectual agility) and Structural Capital
(relationship, organisation, renewal and
development) p. 12
Sullivan, P. H. (1999) Intellectual capital Human capital and intellectual assets
Eustace, C. (2003) Intangible assets Soft intangibles and hard intangibles
Johanson, U. (2000) Intangible resources Not feasible
Rastogi, P. N. (2003) Intellectual capital,
knowledge resources
A classification is not feasible: intellectual capital is the result of the interaction of human capital, social captal and knowledge management Group 4 Group 5 Group 1 Group 3 Group 2
17 The third group uses a threefold classification. With the exception of Stolowy and Jeny-Cazavan (2001) who consider intangible from a strict accounting perspective, the classifications share common sub-groups, even though they use different labels and the content slightly varies.
The first category for all the classifications belonging to this group is human capital, identified with the skills of the workforce. However the MERITUM guidelines (MERITUM, 2002) include the relational skills of the workforce and the organisation in the third category, relational capital.
The second category refers to the “intangible capital of the organization”, as separated from the human capital. It includes multiple resources such as governance, management, information and communication systems, routines, procedures, everything (intangible) that belongs to the organisation.
The third category is relational or external capital and identifies the resources that deal with the external environment. The MERITUM guidelines also include in this group the perceptions that external actors have of the firm. However, this seems more a result of the firm’s relational capital, than a part of it.
The third group of classification identifies mainly three types of intangibles. A conflicting point, often noticed by comparing the different classifications, relates to the internal or external dimension of intangibles, and it is probably a consequence of the different theories on firms boundaries. Kaplan and Norton (2005), for example, have a strict internal perspective and do not involve the external world – (i.e. what some authors call “relational or external intangible capital”) - in their classification criteria. Besides human capital, they add two other categories: organisational culture (values, leadership, capacity to work in teams and “align” competencies, effort and resources to the strategy) and informational capital (informatics and communication systems). These last categories seem to be incorporated into the “intangible capital of the organization” in the other classifications of the group.
Sveiby (1997) instead builds up a classification with measurement purposes through the Intangible Asset Monitor, also includes “external intangibles”. The intangibles are, in fact, grouped under external structure, internal structure (culture and operational systems of the firm) and individual competence of the employees. This last
18 category is different from the one of human capital adopted by other scholars. It includes only the professional workers, conceived as that group dealing with everything related to keep and extend the customer base, as opposed to support staff that has ordinary duties, which is classified under the internal structure.
The fourth group uses two categories to identify intangibles. Bontis et al (1999, p. 12) propose a classification based on the type of managerial action required: “if two intangible resources require different managerial actions than they should belong to two different categories”. The company does not own intangible resources of the human capital since they are embedded in individuals. These are competencies (“skills and know-how”), “attitude” (“motivation” and “leadership”) and “intellectual agility” (“innovation, entrepreneurship” and adaptability). The company instead owns structural capital3 which is formed by “relations” (with the external environment), “organization” (“structure, culture, routines and processes”) and “renewal and development” (“projects for the future”).
According to Hall (1992, p. 139) intangible resources can be divided in ‘assets’ and ‘skills’ (or ‘competences’). While the former enjoys some kind of legal protection, the latter does not. Intangible assets can therefore be identified as ‘intellectual property rights’ (which include: “patents, trademarks, copyright, registered designs”), “contracts, trade secrets and data bases”. On the other side, skills can be identified with the “know how of employees” and the “organizational culture”. Reputation, the knowledge and consideration that a product or service has in the public, could be considered as an asset since it can be embodied in a registered brand name, which enjoys a certain degree of legal protection. Intangible resources can also be classified as people dependent or independent.
Sullivan (1999) bases his classification on the experience of the ICM Gathering Group4 and divides Intellectual Capital into human capital (skills and tacit knowledge of the employees) and intellectual asset (codified knowledge). Intellectual property is defined as the part of structural capital covered by legal rights. The knowledge codification process
3 Edvinsson defines it as “everything that remains in the company after 5 o’clock” (Bontis et al, 1999,
p.12).
4 An informal knowledge-sharing arena of the most successful and experienced firms in the field of
19 transforms the tacit, not-owned knowledge of individuals into the codified, owned and transferable knowledge of the firm and it is therefore crucial for the success of the enterprise. A similar classification, based on the distinction between tacit and codified intangibles, is adopted by PRISM report (Eustace, 2003) and by Hall (1992) who refers to protected and non-protected intangibles. The PRISM report however does not use a distinct classification where each category is well defined, due to the fact that intangibles are so connected that it is hard to determine where one ends and the other begins. The classification is drawn on a continuous line, where one class slowly fades into another. Soft intangibles include mainly latent capabilities i.e. the capacity of the firm to adapt and innovate, and competences i.e. “codified and proprietary capabilities” (op. cit, p.15) strictly connected with technology, information and communication systems. Hard intangibles (or intangible goods) comprehend the resources that enjoy a certain degree of protection. Hard intangibles are further subdivided into intangible commodities (originated by contractual relationships) and intellectual property (originated by the legal system).
The Skandia Navigator measurement model of Edvinsson and Malone (1996) adopts a classification that can be included in this group. Intellectual capital is measured as the sum of human capital (skills, knowledge and value of the workforce) and structural capital (intellectual property, customer capital, capabilities, software and hardware). As for Sullivan (1999), structural capital assumes a peculiar meaning, including the physical infrastructure of the firm.
Finally, some authors (Johanson, 2000; Rastogi, 2003), representing the fifth group, share a common position: a classification for intangibles is not feasible. Johanson (2000) affirms that a classification of intangibles should be based on the description of the process through which intangible resources convert into outcomes. Even though a classification could be approximated and eventually improved, this process will never be totally explained and, therefore, a fully comprehensive classification will never be reached. Rastogi (2003) argues that classifying intellectual capital into human, structural and customer capital is wrong since intellectual capital is not the sum of them. Intellectual capital, in fact, is the result of the interactions of human capital (skills and knowledge of the employees), social capital (value and vision of the firm) and knowledge
20 management (activities related to the creation and development of knowledge resources). These interactions form the “knowledge nexus”, the interface with the external environment that generates the intellectual capital, i.e. the capacity to use skills and knowledge to generate value.
Even though part of the literature (e.g Johanson, 2000; Kaufmann and Schneider, 2004) affirms that the traditional classification in R&D, software, marketing and organization has been overcome by most recent classifications based on human, market (or relational) and structural (or internal) capital, the results of this analysis can only in part agree with this conclusion. Even though there is a group of recent contributions that embrace the threefold classification (see table 1.3, group 3), at the same time there are also influential and recent contributions that propose a classification based on two categories (Eustace, 2003) or on four categories (Lev, 2005), while other authors argue that the classification on four classes is well-accepted (Jensen and Webster, 2006).
Even accepting the existence of a real consensus upon the threefold classification, that could not emerge in this analysis, due to possible biases in the selection of the literature, there is still a problem due to the terminological and conceptual confusion related to the content of the sub-categories (Canibano and Sanchez, 2002; Brennan and Connel, 2000). A recent study (Swart, 2006) tries to “disentangle” the sub-categories by analysing and clarifying their meaning. Accordingly, human capital is represented by the knowledge and skills of the employees; this does not raise too much conflict with the above mentioned classifications which basically agree with this definition. The definition of structural or organizational capital, often used in an interchangeable way, raises more problems. It is suggested that structural (or infrastructural) capital represents the work environment as a whole, including culture and physical; while organizational capital instead, represents the routines, rules and processes through which the firm operates. In this definition structural capital seems to include also tangible resources. If the focus is on the analysis of intangible resources, then the relevant aspects of structural capital is probably identified by its tacit elements such as the capacity to incorporate organizational knowledge, the culture of the firm embedded in routines and the rules through which human capital interacts and generates new knowledge, which can all be identified with organizational capital. Social capital, another element of intangible resources, is defined
21 as “knowledge that is embedded in relationships” (Swart, 2006, p. 142); it is internal to the boundaries of the firm and different from external or relational capital, which is outside the boundaries and involves different learning processes. Social capital is considered distinct from organisation capital; however it is strictly related to it, as the knowledge embedded in the relationships is generated and directly linked to the competence of the firm as a whole. Some doubts therefore can be raised in relation to the treatment of social capital as a distinctive type of intangibles with respect to organisation capital.
1.5 The accounting definition of intangible assets
So far some of the contributions and issues related to the terminology, definition and classifications of intangible resources, often analysed collectively as intellectual capital, have been presented. The last definition I would like to present is the accounting definition that properly refers to intangible “assets”.
A study conducted by Stolowy and Jeny-Cazavan (2001) on the accounting definitions provided by 23 national and international accounting standards shows that even in the accounting field there is heterogeneity of approach to the identification of intangible assets. The methodology for identification is the same as seen above: definition, classification or both. However, in this case, the identification process aims at selecting intangibles that are “assets”, and can be reported in the balance sheet. The recognition criteria therefore have to be added to the definition or classification. For this reason Stolowy and Jeny-Cazavan (2001) suggest the existence of two classes of intangible assets: capitalized and non-capitalized intangible assets.
Another classification is the one that distinguishes between internally generated intangibles - generally not recognized as assets5 - and externally purchased intangibles that can instead be recognized. This underlines the fact that the existence of a market helps to solve valuation problems.
Overall, the treatment of intangibles is far from being homogeneous across different countries and this challenges the possibility of reaching harmonization through the adoption of International Accounting standards. One of the main reason behind the
22 differences in accounting principles is due to the on going debate on whether or not to capitalize intangibles that have seen the involvement of the International Accounting standard committee (IASC), who has recently developed the International Financial Reporting standard (IFRS, previously known as International Accounting Standards, IAS) and National Accounting Boards.
According to IAS 38 an intangible resource is qualified as intangible asset and therefore capitalized, when it lacks physical substance, it is different from financial assets, identifiable and controllable (Pozza, 2004). Besides this, the future economic benefits coming from the assets have to be probable and flow directly to the enterprise, while the costs of the assets have to be measurable (Brennan and Connel, 2000). These conditions are very hard to meet in the case of intangibles, which are often not identifiable because of being embedded in the organization or in its human capital and not separable from them. They are also not controllable due the weak property rights associated to them, and hard to measure, due to the lack of physical substance. For all these reasons accountants are reluctant to include them in the balance sheet, with extremely negative consequence for the market and the firms. Intangible assets as defined by IAS 38 are only a small part of the perceived important intangibles, which backs up the perplexity raised by many scholars about the appropriateness of the accounting definition (Johanson, 2000).
1.6 The distinctive features of intangible resources
Intangibles form a heterogeneous class of resources that is hard to identify and classify. This is not only because they lack physical substance and are “not directly visible” (Bianchi and Labory, 2002, p. 4), but also because each type of intangible is characterised by different peculiar features. As a result, it is hard to propose a model that describes intangibles as a particular type of good, with defined economic properties.
Intangible resources are characterised by weak property rights. The level of weakness though, varies across the different types of intangibles. Some resources, called “asset” in the classification of Hall (1992) or “intangible goods” in the classification of the PRISM report (Eustace, 2003), enjoy legal protection, though only in a partial way. Usually, in fact, the protection has a temporal limit and the level of legal uncertainty is
23 very high (Lev, 2005). This is due to the fact that the rights related to intangibles are hard to specify, therefore contracts are incomplete and do not foresee all the possible future uses assigned by the right, with uncertain consequences in case of infringement (Royal Institute of Chartered Surveyors, 2003). Furthermore the presence of international legal disharmony causes further uncertainty, since it does not guarantee an equal protection in all legal systems (Webster and Jensen, 2006). If legal rights are weak for certain intangibles, they are totally absent for others, such as capabilities, competences and organisational design. In these situations the firm has to resort to alternative mechanisms to defend its intangible resources from competitors. The weakness, or absence, of property rights creates a situation of “partial excludability” since the owner of intangibles does not have full control over them and cannot totally exclude others from their use (Lev, 2001, 2005, Webster and Jensen, 2006). As a consequence, the benefits coming from intangible resources are only partially appropriable, and the level of risk in owning them is higher than that related to tangible resources (Gu and Lev, 2001).
Another relevant feature of intangibles is their interdependence (Bianchi and Labory, 2002; Kaplan and Norton, 2004). Intangibles are “complementary, synergistic and integrative” (Rastogi, 2003) and generate value through a complex process that involves the interaction of other tangible and intangible resources. For this reason they are often firm specific or context-dependent, they can be of value only for the firm that has generated them (Royal Institute of Chartered Surveyors, 2003), or cannot produce the same result if implanted in a different context. As an example, the skills and knowledge of the workforce as a whole can be extremely valuable in a certain firm that provides a certain organisational structure, while cannot be as valuable in a firm that uses a different organisational structure. The firm-specificity of intangible resources can be considered as a mechanism of protection alternative to property rights to defend the firm against the consequences of the non-excludability. However, it is not always possible to enhance the level of firm-specificity of intangibles; therefore the firm often faces imitation or sees its intangible resources appropriated by competitors (as in the case of human capital turnover). A negative side of the characteristic of firm-specificity consists in the fact that intangibles are often embedded in tangible resources; this makes the boundaries between
24 the two often not clear, as in the case of software and computer systems (Clement et al, 1998), and causes issues in intangibles identification.
Scholars indicate legal uncertainty and firm-specificity as responsible for the absence of a market for intangibles. Intangible resources are therefore defined non contractible or non marketable (Gu and Lev, 2001, Bianchi and Labory, 2002, Royal Institute of Chartered Surveyors, 2003, Lev 2005). A partial market exists for intangibles covered by legal rights; however argues, it is not a transparent, institutionalised market, since little information is released about transactions that are not even regular (Lev, 2005). The absence of a market, and the consequent absence of a price that can provide a benchmark for valuation purposes, further increases the risk in holding intangibles since they cannot be sold in case of financial distress. The value of intangibles is then dependent on the “firm’s continuity” (Royal Institute of Chartered Surveyors, 2003, p. 4).
Besides legal uncertainty and firm-specificity, there is another factor responsible for the lack of a market for intangibles. When intangible resources, such as inventions, get codified, they become similar to information. Information is hard to sell because the seller cannot communicate relevant information to the buyer, due to the risk of transferring the object of the transaction itself, and so voiding the purpose of the exchange (Lev, 2005). The same problem holds for ideas; as Arrow (1962) argued, once the idea is known, there is no need to buy it.
Uncertainty characterises intangible resources not only from the point of view of their protection but also from the point of view of the process that generates them. The production (or technological) uncertainty is particularly strong in the process that generates innovations which is characterised by high failure rates (Webster and Jensen, 2006; Royal Institute of Chartered Surveyors, 2003). When the firm invests in R&D in fact, it does not know whether the investment will generate the discovery. The same considerations hold for investments in formal training: not always, in fact, they are able to generate an increase in the level of skills and competence of the firm as a whole.
Some investments in intangible resources are also characterised by elevated sunk costs that are not recoverable in case of failure (Bianchi and Labory, 2006). However this is only partially true, if one considers that even if the object is not directly reached, the firm has gained knowledge and capabilities that can generate spillovers and be reinvested
